City lets $1.8M in taxes slip away, audit finds

The city could have collected more than $1.8 million had it done a better job of following tax procedures, such as keeping assessments updated and accurate and toughening enforcement of historic-property dedication requirements, a report this week from city Auditor Edwin Young concluded.

But officials with the Department of Budget and Fiscal Services and its Real Property Assessment Division, which received the brunt of the criticism in Young’s report, strongly objected to many of the report’s conclusions, calling them "inflammatory and misleading" and based on faulty assumptions.

The City Council asked the auditor’s office in 2010 to conduct a performance audit on the division, which calculates the assessed values of properties to which tax rates are applied for property tax bills.

Among the auditor’s primary findings:

» "Inconsistencies and inaccuracies in classifications, tax assessments and real property tax payments." If the division had used best practices, such as physical inspections, maintaining and updating databases and keeping up-to-date records on exempted and dedicated properties, it could have brought in more than $1.8 million more in additional tax revenues. Property data are "collected but not maintained or updated and a quality assurance program does not exist," the report said, while physical inspections of properties are limited.

» Numerous violations among those obtaining exemptions for properties identified as historic residential properties. The audit said that based on its estimates, the city could have received more than $555,000 in additional tax revenues had there been stricter monitoring and enforcement of the rules governing the exemption program.

» An estimated 68 property owners received "questionable tax adjustments" totaling $381,744 after the division attempted to correct tax classifications of properties that had been incorrectly reclassified from residential to commercial or industrial. Other property owners, however, paid too much, the audit said.

Overall, the report said, "improved data accuracy and reliability in conjunction with City Council actions, could increase real property tax revenues."

Division officials panned the auditor’s report, insisting they have made significant improvements since a 2010 Hono­lulu Star-Advertiser story exposed how nearly 250 property owners were receiving breaks with little monitoring or enforcement by city inspectors. The break entitles homeowners to pay a $300 flat-rate "minimum tax" — much less than what they would pay if their taxes were calculated based on their assessed values — in exchange for giving the public the opportunity to see and appreciate the historic nature and other aesthetics of the properties.

The Star-Advertiser at the time found about 20 homes getting the tax break even though the public views were largely obscured from the public, a stated requirement for receiving the exemption.

Among the homes that qualified was one in Manoa where Mayor Kirk Caldwell and his wife, Donna Tanoue, reside. The couple stopped taking the tax break two years ago, Caldwell spokes­man Jesse Broder Van Dyke said. He stressed that at no point has the home been found in violation of the requirements for exemption.

"We feel the Real Property Assessment Division did its best in trying … to correct any problems that were identified earlier," said Robert Magota, division acting administrator.

Deputy Budget Director Gary Kuro­kawa, longtime administrator of the assessment division, said the audit called on his agency to adhere more to the Uniform Standards of Professional Appraisal Practices guideline. The standards allow for "jurisdictional exceptions" that call for local laws to take priority. "We have to follow what the ordinances require us to do," Kuro­kawa said.

For instance, Hono­lulu has many more property classifications than in many mainland jurisdictions, Magota said. USPAP also does not address the issue of exemptions for historic properties, he said. "We have to look at what the law says and how it applies here."

Magota said the $1.8 million amount that Young’s report believes the city could have collected is "distorted" and based on an unfair set of data focused on a small sample size and not representative of the larger picture.

The report took the division to task for not taxing adult care homes in residential areas at the higher commercial rate, Magota said. The division cannot take that action until another department clears up the illegal use of having a business in a residential area, he said.

After the 2010 Star-Advertiser story, the Council passed laws making it easier for city officials to scrutinize historic properties and required the owners to put up signs identifying their properties. Magota said the division felt it fair to give the property owners a reasonable time to comply with the strengthened requirements, including time to order and install the new signs. The auditor visited many of the properties during that period, he said. In the end, those who qualified continue to receive exemptions, while 20 to 30 properties were removed from the list, he said.

Kurokawa said he reviewed the 68 property owners the auditor believed wrongly received adjustments. "We went back and we checked all the applications, and we feel comfortable that everybody that received a tax benefit was deserving of it."

The adjustments came after Council members raised concerns and introduced a resolution calling on the division to look into complaints by property owners who felt their homes were unfairly reclassified from residential to commercial or industrial.

Council Budget Chairwoman Ann Koba­ya­shi said she believes the division has been working to correct past problems.

She noted that this past year, the division gained three inspector positions who can check for compliance with classification and exemption laws.

Because of the recent changes in the historic residential property programs, more homes are in compliance, and fewer are part of the program, Koba­ya­shi said.

In a city that is projecting to raise $834 million from property tax revenues in the coming tax year, the $1.8 million in lost revenue "is not that much," she said. "I think the department is doing a pretty good job."

Young said his office stands by its report, noting that the department gave "a typical response to our audit reports."